Kaplan: Risk Management: Section 1 Question 3

I'm answering this question at the moment, where it asks about the difference between agreed and indemenity value protection. I understand the difference between the two (agreed is a fixed unalterable amount and indemnity is the agreed amount or 75% of pre-disabililty - whichever is lower).

The question asks which is more appropriate for an employed or self-employed person. It would seem that they are subtely implying that one plan is better than the other.

However I can't understand why an indemnity plan would ever be better? With an agree plan I'm always getting the agreed amount (indexed against inflation). With indemnity I'll only ever receive 75% of the payment. If I started earning enough money that the 75% of my salary was equal to the agreed amount, then surely you would then increase the agreed amount to an amount which is 100% of your salary.

I must be missing something vital, but in what possible scenario is an indemnity plan better?

i passed this assignment recently and from all I gather is that there may not be right or wrong answer it is being able to justify what you write down. That is the key in all of these subjects.

FOr the self employed person i did an agreed amount, because their income may change over time depending on the economy. As opposed to an employed person whose income is fixed, and may rise over the years with pay rises etc. So an indemnity plan is probably better.

Samaka I can see why your confused as you've made an error in your basic assumptions.

Income protection only pays up to a maximum of 75% of your income. So if you were on an income of $100,000 the most you could protect is $75,000 regardless of whether you used an agreed or indemnity contract.

The difference is that when you go to lodge your claim for illness under an agreed contract your guaranteed to get $75,000 pa, but with the indemnity contract you’ll be paid the lower of either 75% of your average salary over the last 2 years or the original 75% that you covered.

Indemnity style contracts have lower premiums as the benefit is not guaranteed to be the amount you are insured for. They are suited to people in stable employment, with an income that isn’t too variable.

It wouldn’t be suited to the self employed or those paid based on commission as their income would be too variable and volatile. The risk is that when they go to make a claim and they get paid less than they were insured for.

In my case, I choose Agreed because I did not want to pay more premium. My salary is 160K and if I select indemnity contract, I pay more premium. We can survive with $70K, so I choose agreed to save money.
Actually it depends on individual circumstances.